Article  
                                                                                                                                        Kardan Journal of Economics 
                  On the Determinants of Economic                                                                                           and Management Sciences 
                  Growth: Empirical Evidence from 
                                                                                                                                                                        4 (2) 82–97 
                  Afghanistan                                                                                                                    ©2021 Kardan University  
                                
                                                                                                                                                        Kardan Publications  
                                                                                                                                                          Kabul, Afghanistan  
                                                                                                                                     https://kardan.edu.af/Research
                    Matin Karimi                                                                                                          /CurrentIssue.aspx?j=KJEMS 
                                
                    Shahzad Anwar  
                                
                    Usman Ali  
                                
                      Abstract 
                                
                            This research reviewed the determinants of economic growth in Afghanistan on the basis of 
                                
                      endogenous and exogenous growth theories and empirical studies. The main objective of this 
                      research  was  to  address  the  impact  of  domestic  investment,  export,  official  development 
                                
                      assistance and import (independent variables) on the economic growth (dependent variable) in 
                                
                      Afghanistan. This study adopted a quantitative method of Ordinary Least Square regression and 
                                
                      Co-integration analysis to address the impact and long-run association among variables. The 
                      findings  from  OLS  regression  depicted  that  domestic  investment,  export,  and  imports  are 
                                
                      significantly correlated to economic growth, while foreign aid/official development assistance are 
                                
                      insignificant. In addition to OLS regression, researcher also did Johansen Co-integration test to 
                                
                      determine the long-run association of variables.  It was found that long run relationship exists 
                      among the variables, which reaffirm that domestic investment and foreign aid are significant 
                                
                      variables in bringing alteration in economic growth. This means that the Afghan government 
                                
                      should  emphasize  on  attraction  of  domestic  capital  to  boost  investment  and  achieve  high 
                                
                      economic growth as accordingly.  
                                
                      Keywords:  Economic  Growth,  Foreign  aid,  Domestic  Investment,  Imports,  Exports  and 
                                
                      Afghanistan 
                                
                      JEL Codes: F35, F43, F1, P45 
                                
                                
                               Introduction  
                                     During the course of history, social welfare and economic growth have 
                               been  decisive  needs  of  every  society  and  its  citizens.  In  order  for 
                               governments to satisfy the needs of its citizens, some of them have been able 
                               to achieve tremendous victories and climbed far ahead over the economic 
                               ladder of success. However, majority of the remaining governments have 
                               been left behind and could not make it to converge (Aghion & Howitt, 2008). 
                               In order to understand that what causes economies to grow and why very 
                               few countries made it to uplift their economic conditions, while majority of 
                               the rest couldn’t converge, it’s necessary to know about the term economic 
                               growth, its patterns, determinants, and fundamental causes (Grossman & 
                               Helpman, 2004; Aghion and Howitt, 2008; Acemoglu and Guerrieri, 2008).    
                                                                                                                                                                            82 
                                           Karimi, Anwar & Ali  (2021) 
            According  to  majority  of  growth  theories;  accumulation  of  human 
          capital,  physical  capital,  and  increase  in  productivity  as  result  of 
          technological advancement are some of the fundamental determinants for 
          long-run economic growth (Harrod, 1939; Domar, 1946; Solow, 1956; Swan, 
          1956;  Cass  &  Koopmans,  1965;  Lucas’s  1988;  Barro,  1990;  Romer,  1990; 
          Grossman  &  Helpmann,  1991;  Rebelo,  1991;  Aghion  &  Howitt,  1992; 
          Ortigueira & Santos 1997). However, for underdeveloped countries which 
          cannot  generate  adequate  stock  of  capital  from  domestic  source, 
          economists proposed to fill that gap through foreign aid or also known as 
          Official Development Assistance (Mercieca, 2010). Since ODA is inherently 
          an  exogenous  determinant  to  economic  growth,  it  thus,  can  create 
          macroeconomic volatility as a result of decrease in the stock of foreign 
          reserves, if aid giving country stop funding (Collier, 2007; Joya, 2011; Janjua 
          et al., 2018). According to Denison (1962), economic growth is the inflation 
          adjusted increase in the production of goods and services over a specific 
          period of time. Given that, economist implies that economic growth usually 
          leads to more employment, increase in consumption, poverty reduction, 
          and  overall  social  welfare  (Aghion  &  Howitt,  2008).  Majority  of  the 
          neoclassical and endogenous growth theorists agree upon that an increase 
          in economic growth is commonly measured through constant increase in 
          GDP per capita (Aghion & Howitt, 2008). Contrarily to that, Afghanistan for 
          the past four and a half decades has had an unstable and unparalleled 
          economic growth due to so many reasons like macroeconomic volatility, 
          major rely on foreign aid, civil wars, being landlocked, weak institutional 
          framework,  corruption,  and  some  sociocultural  barriers  (Joya,  2011). 
          According to the United Nations country-wide database facts and figures, 
          since 1970’s until 2014, Afghanistan’s GDP had an unstable and unparalleled 
          cyclic growth; sometimes from -0.3% to -16% (1970’s), sometime from -22% to 
          +49% (1990’s), sometimes even from -5% to +56 (2000) and +14% to +5% 
          (2013). However, since 2014 onward, Afghanistan maintained to have an 
          average GDP growth rate of +2.2%, which is indeed, not as perfect as it 
          should have been, but at least it shows that Afghanistan is on a constant 
          track of growth. Considering unparalleled changes in the GDP growth rate 
          of  Afghanistan,  it  can  be  explicitly  observed  that  due  to  some 
          unprecedented events Afghanistan was not able to maintain a constant 
          growth rate and this itself arises many questions in the mind of a researcher 
          to study about the factors and causes of economic growth in Afghanistan.  
          1.1 Research Objectives 
            With respect to problem statement and empirical literature review, lack 
          of adequate statistical facts and figures pave the way for this research to fill 
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                       On the Determinants of Economic Growth: Empirical Evidence from Afghanistan  
                       the gap of economic growth literature in Afghanistan and try to find some 
                       significant evidence about the factors which affect economic growth of 
                       Afghanistan. Thus, the following two research objectives are considered for 
                       the study.  
                           1.     To  determine  the  impact  of  official  development  assistances, 
                                  domestic investment, imports and exports on economic growth of 
                                  Afghanistan. 
                           2.     To determine the long run association among the economic growth, 
                                  official development assistances, domestic investment, imports and 
                                  exports of Afghanistan.    
                       2. Literature Review 
                              One of the main questions that always remained a debating topic in the 
                       area of development economics is that why some of the countries are still 
                       poor and how they can converge towards the rest of advanced and rich 
                       countries. In order to find the answer, economists for the past one century 
                       developed numerous growth models such as Gustav Cassel model (1924), 
                       Harrod-Domar model (1939), Solo-Swan model (1956), AK model (1986), 
                       Product-Variety model (1990-1991), Schumpeterian model (1992-1998) and 
                       many more to know precisely about the mainstream causes, factors, and 
                       effects of the economic growth. However, the pattern of said models are 
                       different, but up to a certain level majority of theorists have agreed upon 
                       mainstream  variables  such  as  human  capital,  physical  capital,  export, 
                       import, and foreign aid and tried to incorporate them into their models 
                       differently, so that comprehensive and convincing results can be obtained. 
                              Literature related to economic growth is discussed from a broader lens 
                       through theoretical and empirical review of the topic. However, there might 
                       be inadequate literature about economic growth in Afghanistan, but every 
                       effort  is  made  to  compile  a  number  of  research  papers  made  by 
                       independent researchers, national organizations, and some international 
                       non-governmental  organizations  which  are  considering  the  issues  of 
                       economic growth in Afghanistan and South Asian region.  
                       2.1  Theoretical Review 
                              In many empirical studies and economic books it’s expressed that the 
                       starting point for modern economic growth theorization is the neoclassical 
                       Solo-Swan’s model (Petrakos & Arvanitidis, 2008; Aghion & Howitt, 2008), 
                       but historically it’s the classical economists such Adam Smith (1776), David 
                       Ricardo (1817), Thomas Malthus (1798), Gustave Cassel (1924), Allyn Young 
                       (1928), Joseph Schumpeter (1934), and Frank Knight (1944) who has initially 
                       expressed their views about the basic ingredients of economic growth (Kurz 
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                                                                                                Karimi, Anwar & Ali  (2021) 
                     and Salvadori, 2003; Barro and Sala-i-Martin, 2004; Hagemann and Scazzieri, 
                     2009). Now in order to have a general, yet profound understanding about 
                     the  historic  development  of  growth  theories,  this  paper  considers 
                     describing the growth theories on the bases of exogenous growth models 
                     and  endogenous  growth  models.  However,  for  statistical  analysis  and 
                     development of this paper’s model, Solo-Swan’s exogenous growth model 
                     is considered as a base theory. 
                     2.1.1   Solow-Swan Growth Model 
                           Solo-Swam model of growth was independently developed by Robert 
                     Solow and Trevor Swan in 1956 with the basic assumptions of constant 
                     returns to scale, diminishing marginal productivity of capital, exogenously 
                     determining the technological advancement, and substitutability between 
                     labor and capital (Petrakos & Arvanitidis, 2008). The Solow-Swan model 
                     principally  sets  within  the  framework  of  neoclassical  economics  which 
                     attempt  to  explain  the  long-run  economic  growth  by  looking  into  the 
                     technological  progress  in  labor  productivity  and  capital  accumulation. 
                     However, for economic growth this model explicitly emphasizes on capital 
                     accumulation and inducement for saving, but still, it expresses that growth 
                     will not last indefinitely without technological progress which neoclassical 
                     theory takes as being impartial of economic forces, or exogenous (Aghion 
                     & Howitt, 2008). 
                           The neoclassical Solow-Swan growth model is known as an exogenous 
                     growth model due to its profound philosophy unlike the precursor model of 
                     Harrod-Domar that for long-run economic growth increases in productivity 
                     (commonly referred to as technological progress in the exploitation of 
                     factors of production) is a key exogenous determinant. However, for short-
                     run economic growth they have agreed with the Harrod-Domar model on 
                     investment and labor productivity as the principal determinants (Solow, 
                     1956 & Swan, 1956). 
                     2.1.2  Exogenous Growth Models 
                           Before  emergence  of  exogenous  growth  theory  or  also  known  as 
                     Solow-Swam model, Roy F. Harrod (1939) and Evsey Domar (1946) tried to 
                     integrate Keynesian analysis with the economic growth elements to show 
                     that the capitalist system is inherently unstable and that it cannot adjust 
                     itself  in  the  long-run  between  population  growth  and  stock  of  capital. 
                     However, in principle, Harrod was stressing on saving as a determinant for 
                     long-run economic growth and investment along with labor productivity as 
                     the  key  determinants  for  short-run  economic  growth  (Harrod,  1939). 
                     Nonetheless, Domar was agreeing on saving and investment (capital stock) 
                     as the key determinants of economic growth, but with a slight extension 
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